ERP ADOPTION COST FACTORS IN SMES

12 

Loading.... (view fulltext now)

Loading....

Loading....

Loading....

Loading....

Full text

(1)

Moutaz Haddara

ERP Adoption Cost Factors in SMEs 130

ERP ADOPTION COST FACTORS IN SMES

Moutaz Haddara,

Department of Information Systems, Faculty of Economics and Social

Sciences, University of Agder, Kristiansand, Norway.

Moutaz.Haddara@uia.no

Abstract

Small and medium enterprises (SMEs) have limited budgets, resources, and great sensitivity to costs. When SMEs take the first step into implementing an enterprise resource planning (ERP) system, they need to think about many things, foremost the cost of adoption. Most ERP implementations fail due to inaccurate and optimistic budget and schedule estimations, as well as, anticipating indirect costs beforehand is problematic. With the deficiency of a clear model of cost factors for ERP adoptions, ERP adoptions face a high risk of failure Failures could be caused by several factors, but the scope of this research is focused on studying the factors that escalate costs. This could aid SMEs in visualizing the different expected costs, and would consequently assist in better future cost management and estimations. There has been plenty of research in ERP; however, a clear gap in ERP cost management and estimation exists. This paper focuses on identifying direct and indirect cost factors that influence total costs in the ERP adoption process. The paper presents a cost list that has been developed through literature and an ERP expert panel. Furthermore, this study validated the costs list through interviews with different stakeholders within ERP adoption projects in Egypt.

Keywords: ERP; cost estimation; cost factors; SMEs.

1

I

NTRODUCTION

An ERP system implementation is one of the largest projects an enterprise could embark on. Yet many factors lead SMEs to an ERP adoption decision. ERP projects may vary in size and structure, each requiring careful management decisions during the implementation process (Markus, Tanis, & Van Fenema, 2000). ERP system implementation is a critical project that requires commitment, substantial amount of resources, and organisational changes (Moon, 2007). Size and structure of organisations implementing ERP systems are not the only variables within the ERP project. Its specific context factors (Chien, Hu, Reimers, & Lin, 2007; Haddara & Päivärinta, 2011), existing software reuse, and the adoption of a specific vendor ERP implementation methodology are also important factors (M. Daneva, 2007). Given the complexity and high costs of ERP systems, organisations need to think about many things, foremost among which is cost of adoption (Van Everdingen, Van Hillegersberg, & Waarts, 2000) With the shortage of proper representation of cost factors and cost estimation methods, especially for SMEs, ERP systems adoption projects are facing challenges in identifying and estimating costs, size, time, effort, productivity and other cost factors (M. Daneva, 2004; Irani, Sharif, & Love, 2001; Seddon, 2003; Stensrud, 2001). Furthermore, when ERP adopters cross their estimated budgets, this could be very critical for an SME with limited resources. Some studies argue that the rise in costs is sometimes not relatively high when measured against benefits. Although this argument might be true, still the main argument here is not the cost/benefit analysis, it is the projected budget vs. the actual money spent on the adoption project. Even if the expected benefits are high (usually long term), this would not protect companies from cancelling the project, or going bankrupt due to unanticipated cost overruns, which could exceed their allocated budgets and capacities. In addition, benefits and their associated costs should be projected

(2)

Moutaz Haddara

ERP Adoption Cost Factors in SMEs 131

correctly prior to the project, as many companies implementing ERP systems filed for bankruptcy (Al-Mashari, 2002; Moon, 2007; Newman & Zhao, 2008), and this was mainly due to a flawed ERP budget and schedule estimations (Holland & Light, 1999; Jones, 2007; Martin, 1998). Thus, the costs perspective could be more crucial despite the potential benefits, as you can often gain more benefits when you spend more money, but it is all about your budget constraints and availability of resources (Elragal & Haddara, 2010).

Because SMEs do not possess similar amount of resources other large enterprises have, thus they are more cost sensitive. Moreover, any cost rise or project delays would seriously affect SMEs’ survival in the market. Since ERP adoption within SMEs is still immature, researchers need to inspect and identify the basic drivers that influence ERP adoption decisions (Van Everdingen, et al., 2000), specially ERP adoption costs. In general, IS and ERP implementations’ costs are mainly divided to direct and indirect. Direct costs are the expenditures that are directly associated with the implementation and acquisition of new technology or system (Love, Irani, & Edwards, 2004). Clear examples of ERP direct costs could be the license and IT infrastructure costs. Alternatively, indirect costs would include human and organizational related costs that usually occur during the implementation process (Irani, Love, & Correspondence, 2002). Like business process re-engineering, HR costs, project schedule delays, etc. Moreover, most of the informants interviewed in this research view any unanticipated cost that crosses the estimated plan and budget as an indirect or hidden cost, even if it was a marginal increase in a direct cost. Estimating ERP adoption direct and indirect costs is a problematic process. The next section will highlight some of the problems that face organizations in general and SMEs through their investment justification and budget estimation phases.

The aim of this study is to present and test the validity of cost factors that occur within ERP adoption projects in Egyptian SMEs. These cost factors have been identified and published in a previous research, and this research is a continuation by validating the factors list through interviews with ERP-adopting organizations, consultants, and vendors in Egypt. There is a considerable gap in IS research regarding cost factor identification and classification (Irani & Ghoneim, 2002). The presented list could lead the way towards a more solid and valid costs’ list percentages and weights, which consequently could be used as a cost factor indicator or estimation guide for potential adopting organizations. The Egyptian context was chosen as a research kick-off, as it was convenient to the author due to the availability and access to data. Moreover, based on initial pilot interviews with ERP consultants, many of them stated that the current cost estimation methods are not adequate for ERP settings. In addition, they stated that the usual European or American cost factors weight distribution (e.g. accountants’ rate/hour) is not relevant to the Egyptian context. The results presented in this study could enrich ERP literature and practice if further validated, extended, and compared with other research in other countries or contexts.

The rest of the paper is organized as follows. Section 2 summarizes the existing literature on ERP adoption cost management, estimation, and issues of ERP implementation projects in SMEs. Section, Section 3 presents the research methodology and target cases. Section 4 presents the results and discusses the contribution to previous literature. Section 5 discuss the limitations of the study after which, section 6 concludes and presents potential future research avenues.

2

L

ITERATURE

R

EVIEW

In most cases, ERP systems are the solution to manage business and coordination complexities effectively (Buonanno, et al., 2005). Due to the close-to-saturation ERP adoptions within large enterprises, as nearly every major business has adopted one or more ERP systems (Møller, Kræmmergaard , & Rikhardsson, 2004), and with the increasing number of alliances, value-webs, data flows, and number of complex operations within SMEs, and the fact of having several Silo computer systems within a business makes it too costly in order to store and rationalise redundant data (Davenport, 1998). Thus, SMEs now are taking

(3)

Moutaz Haddara

ERP Adoption Cost Factors in SMEs 132

ERP adoption decisions, as they believe that it is a step towards process standardisation (Seddon, 2003), cost effectiveness, and a way to survive the severe market competition (Fui-Hoon Nah, Lee-Shang Lau, & Kuang, 2001; Klaus, Rosemann, & Gable, 2000). That also explains why SMEs are a prospective interest for major ERP vendors like SAP, Oracle, and Baan (Van Everdingen, et al., 2000).

According to Scheer & Habermann (2000), Baan, Peoplesoft, as well as SAP state that the software license purchase is not the big bulk, as customers could spend around three to seven times more money on the implementation and its complementing services than the initial software license costs. That is a clear cause for the increasing number of law suit cases related to ERP’s erroneous adoption cost estimations (Jones, 2007). Hence, ERP cost estimation effort should be embarked closely by beneficiaries (clients), vendors, and third party consultants if any, because the vendor’s cost estimates alone could omit some customer specific costs; like hiring, search and vendor selection costs, and business process reengineering. Markus, et al (2000) divided and classified the ERP implementation project into three phases, a) project, b) shake down, and c) onward and upward phases. Particularly, the ERP system is introduced in the company within the project phase, and the success of this phase is measured according to cost and time completion within schedule and budget. (Equey, Kusters, Varone, & Montandon, 2008) found that size, consultants’ experience, and people characteristics have a great influence on ERP projects costs.

Although ERP adoption failures could be caused by several factors, the aim of this research is focused on studying costs related factors. According to Holland & Light (1999) and Martin (1998), around 90% of ERP implementations are behind schedules, over their budgets, or entirely cancelled due to rigorous underestimations during the requirements phase (Jones, 2007) in which unwarranted optimism and overlooking in cost and schedule estimations, could be the cause, rather than project management pitfalls (Holland & Light, 1999; Jones, 2007).

In literature, many studies discuss the difficulty of estimating costs of IT and ERP adoption projects. Love et al. (2004) have stated that in most IT adoption cases, both direct IT and indirect costs cross their estimated value. The convolution in IT and ERP adoption cost identification and estimation relies on the fact that it is a complex task (Buonanno, et al., 2005; Maya Daneva & Wieringa, 2008; Jones, 2007; Stensrud, 2001; Vogt, 2002); it requires vigilant analysis for both direct and indirect costs. The noticeable gap in IT and ERP adoption cost management and estimation areas is partially because the formal conventional budget estimation methods fail to reflect, quantify and accommodate indirect adoption costs (Alshawi, Irani, & Baldwin, 2003; Ghoneim, 2007; Irani, et al., 2001). Similarly, the IT established and widely used software cost estimation models e.g. COCOMO II (B Boehm, 2000) are not appropriate within an ERP setting (Abdel-Hamid, Sengupta, & Swett, 1999; Al-Mashari, 2002; Maya Daneva & Wieringa, 2008; Jones, 2007; Jorgensen & Shepperd, 2007; Myrtveit & Stensrud, 1999; Stensrud, 2001). The problem with the COCOMO family and similar models is that they are more focused into software development cost estimation. Their cost drivers are based on factors that might not be adequate or applicable in an ERP setting, as lines of code (KLOC) and development time (D) are not considered relevant drivers in an ERP adoption project {Abdel-Hamid, 1999 #18;Daneva, 2004 #7;Daneva, 2008 #21;Jorgensen, 2007 #15}. Moreover, the cost factors in software development might be easier to project and identify, than those of complex implementations. Though, these models could be relevant to ERP software development and pricing.

There have been few efforts made towards ERP cost exploration and estimations. However, these efforts were either (a) driven into generic software development cost estimation (pricing), like (B. Boehm, 1981; B Boehm, 2000; B. Boehm & Sullivan, 2000; Jones, 2007), or (b) were closely focused on ERP in a specific context, like ERP cost identification and estimation from a portfolio management lens (M. Daneva, 2007), or (c) for cross-organisational ERP projects cost estimations (Maya Daneva & Wieringa, 2008), or (d) adopting a Transaction Costs theory lens to govern ERP costs in a service oriented architecture (SOA) implementation setting (Brocke, Schenk, & Sonnenberg, 2009).

(4)

Moutaz Haddara

ERP Adoption Cost Factors in SMEs 133

The costs list presented in this research could be used in order to project more realistic cost estimates and factors, while benefits should be the motivation for implementing an ERP system in first place. Usually the expected benefits are the system requirements which are based on the requirements analysis included within the request for proposal (RFP), and several cases show that some Egyptian SMEs do not follow any formal benefits realization practices (Haddara & Päivärinta, 2011). There is an apparent gap in ERP research, that there are almost no existing studies that focus on ERP cost estimation, ex-ante evaluation or costs identification in SMEs context (Haddara & Zach, 2011).

3

R

ESEARCH

M

ETHOD AND

D

ESIGN

This research is a continuation to validate cost factors based on data collected from an Expert Panel along with actual data from vendors, implementation partners, Investment and ERP consultants, and 4 SMEs that already completed their ERP adoption process. This research applied a multiple case study design, as it has more investigative recompense compared to single case study, as well as it provides a flexible approach for Information Systems research (Cavaye, 1996; Eisenhardt, 1989; Yin, 2003). Furthermore, in order to build strong substantiation of constructs, data triangulation as a mixture of qualitative and quantitative data collection methods were used (Eisenhardt, 1989). The following section provides more details concerning the data collection process.

3.1 The Experts Panel

Due to the implications of this research into practice, an Experts Panel (EP) has been conducted. The EP recommendations and insights were very valuable to this research within its early stages, as experts provided valuable inputs that helped the researchers to better understand the phenomena or the problem they are investigating. The EP serves as an initial research onset that aids the mapping of the researcher’s ideas and research problems with practice. Moreover, the EP was used as a mean of eliciting knowledge from ERP experts. The EP approach included a combination of Delphi, Focus Groups, and mind mapping techniques. This group method was chosen by researcher in order to discuss and reflect on the participants’ personal experiences with relation to the researcher’s research topics (Powell & Single, 1996). In addition, face-to-face group techniques could be fruitful while investigating a certain phenomenon at the early exploratory stages of a research (Hines, 2000; Kreuger, 1988). Also, the experts panel could represent respondents’ beliefs, experiences, and responses in a way in which would not be suitable using other techniques like one-to-one interviewing or questionnaires (Gibbs, 1997). Additionally, a number of researchers have also pointed out that group brainstorming and discussions can generate more momentous comments than usual interviews (Hines, 2000; Watts & Ebbutt, 1987). As recommended by (Willis & Miertschin, 2006), dynamic mind maps were used as tools for representing the ERP cost factors list graphically, which stimulated the participants to engage with content and provide modifications and rankings for the initial mind map. Moreover, mind maps could be useful to use in cases where problem solving, group understanding and brainstorming, delivering information, and evaluation of participants’ beliefs are needed (Willis & Miertschin, 2006). The illustrative dynamic mind mapping technique is similar to cognitive maps, which are used to present and record qualitative data in group discussions (Eden & Ackermann, 2004). Please refer to (Elragal & Haddara, 2010) for more details about the benefits, limitations, and comparisons of the experts panel conducted within this research, in contrast with other research methods.

The panel included key experts involved in ERP implementations in Egypt. The participants were from selected ERP consultants, vendors’ representatives and implementation project managers. The expertise of the participants represents diverse knowledge in a broad range of international corporations and industrial sectors. The potential participants were chosen according to their number of clients and market share in the Egyptian ERP market. Twelve potential participants were contacted by phone and via e-mail, and eight

(5)

Moutaz Haddara

ERP Adoption Cost Factors in SMEs 134

experts responded and participated. The panel included vendor consultants from SAP, JD Edwards, Focus ERP, independent ERP consultants, project champions and managers from different industrial SMEs. The variety of experts was to ensure that the researcher captures different views and perspectives on costs. The EP main purpose was to develop a list of costs (see fig. 1) that occur during ERP implementations in SMEs and rank them according to their influence on total costs. The EP took two rounds which included lists, rankings, discussions, and visual costs list presentation. At the end of the panel, a cost list was developed and then confirmed with all 8 experts.

Figure 1. Expert panel-developed costs list. Adopted from (Elragal & Haddara, 2010). 3.2 Interviews and cases

The author conducted twenty-two qualitative face-to-face interviews all in all. But only nine interviews were carried out with informants that have been involved in the ERP budgeting and cost control process. The interviews were conducted in eight companies in Egypt, and discussed the whole ERP lifecycle, from the pre-selection phase until the post-implementation phase. The participants included a mixture of stakeholders who have been involved in ERP system implementations, four SMEs (6 interviews) which had implemented ERP, a major local ERP vendor, major ERP implementation consultants and vendor partners (2 companies), and a senior independent ERP consultant in Egypt.

According to Egyptian government official reports (Economic-Research-Forum, 2004; Lerchs, 2001, 2002), the SME classification and definition in Egypt is not yet clear nor standardized, especially across industrial sectors (Lerchs, 2002), as the current classification through number of employees and fixed assets is not adequate (Lerchs, 2001). Thus, the interviewees where asked to classify their organizations’ size according to their annual turnover, number of employees, number of ERP users, and their perceived size in their industry market in comparison to their same industry competitors. Three were classified as medium-sized, and one as a small enterprise.

Altogether six interviews gathered information from the four SMEs including two manufacturing companies, one in the importing and distribution business, and one retail company. One interview focused on a vendor representative, two on implementation consultants, and an independent senior ERP consultant. The vendor and implementation consultants were chosen according to their recognition and number of projects within the Egyptian SMEs. The informants had experience on various ERP systems including:

(6)

Moutaz Haddara

ERP Adoption Cost Factors in SMEs 135

Al Motakamel (local ERP); Focus;

Infinity (local ERP); JD Edwards;

Oracle E-Business Suite; SAP;

And various in-house developed Integrated Enterprise Applications.

As the interviews needed informants with a background of the financials involved in the ERP adoptions, all the interviewees were in a senior or managerial position. The interviews topics covered the ERP selection processes, feasibility studies, investments justification, budget estimation process, and ex-post investment evaluation. All the informants were given the cost list developed by the panel of experts (fig. 1) in order to validate it and modify it if needed. They were also asked to give percentages on the cost factors according to their actual expenditure in their projects. That would aid in ranking cost factors in relation to total costs, and would aid other SMEs to identify their potential costs and budgets. The interviewees were briefed about each cost factor and its sub-factors, so they can easily identify and map their costs under the corresponding umbrella.

All interviews were digitally recorded. In the following, the four target companies, “Ra”, “Osiris”, “Amun”, and “Ramesses”, who had implemented ERP systems, are introduced in more detail. The company names are fictitious to preserve anonymity (table 1).

Company

(size) Informants Ownership Industry/Business

Ra

(Medium) IT Manager, business solutions manager Private stocks Automotive parts distributor Osiris

(Medium)

ERP project steering committee member,

IS Manager Family owned Retail

Amun

(Small) ERP project steering committee member Family owned Printing & packaging

Ramesses

(Medium) Steering committee member Family owned Dairy products

Cheops Branch Manager ---- Local ERP vendor

Sphinx ERP Project Manager --- ERP implementation partner

Tut ERP Solutions Department Manager --- ERP implementation partner

--- ERP senior independent consultant --- ERP/BI consultant

Table 1. Overview of informants and target cases

Ra had an in-house developed system for many years before moving to an international ERP system. The company was mainly facing scalability and technical problems with the existing legacy system that were affecting its day-to-day operations. Moreover, they had other challenges with the system that “were due to the employee turnover, absence of sufficient system documentation, and support.” (IT manager). Thus, the company decided to acquire a standard ERP package, which would be “more stable and easier to handle,” (IT manager).

(7)

Moutaz Haddara

ERP Adoption Cost Factors in SMEs 136

The company used no external ERP consultants, as they see themselves competent enough to identify needed requirements, select, and manage the ERP system. The company estimated its own budget for the project, without the use of external investment consultations.

The project team was composed of internal employees and the implementation partners. The system went live in January 1, 2008.

The ERP modules implemented were Finance and Controlling (FC), Sales and Distribution (SD), Material Management (MM), Customer Service, Human Resources Management (HRM), Customer Relationship Management (CRM).

Osiris deals with a diverse number of commodities that are sold directly to customers through one outlet. The commodities vary from fresh food, fast moving goods, non-food commodities, textiles, and furniture. Prior to the ERP adoption, they had a local Egyptian ERP system that had a complete retail-specific package. It was consisted of an ERP as a back office, and a point of sale (POS) application as a front office. This system had many technical problems including poor performance, slow transactions, and imprecise report calculations. Although it was both a front-end and back-end solution, still it had many integration problems with the POS, which dramatically affected the companies operations. Thus, Osiris decided to move to an ERP package that can provide integration with a POS solution. The company had an IT consultant involved in the whole project, and he developed the main budget estimation for the adoption project.

The project budget was circa “3 to 5% of the yearly sales revenues,” a steering committee member mentioned. The implemented modules were FC, Capital Asset Management, Logistics, Procurement, and SD. The system went live in August 2007.

Amun is specialized in producing paper and carton supplies for fast food restaurants in Egypt. The company’s manufactures several paper, carton, and wrapping products. The company had several speckled applications before migrating to an international ERP system. Most of the processes were not integrated within the applications used, and were manually done. The applications were mainly built on Microsoft Excel.

The company suffered many business and technical problems due to the lack of integration between the applications. “The existing scattered applications did not meet the business requirements and they ware not integrated, for example we had problems processing orders, sales’ planning was not integrated with production planning,” a steering committee member mentioned.

The ERP system was implemented in 2007, and the modules were FC, order management, purchasing, warehousing, plus an external customized payroll system. The company has an IT consultant, which was engaged in all the ERP adoption phases at that time.

Amun hired a senior ERP consultant, which helped in estimating the costs and budget needed for the ERP implementation.

Prior to the ERP adoption, Ramesses had several scattered applications, which lacked integration and scalability. “We had scattered systems, so we needed integration […], the systems we had were working with an Access database, which could not handle the business transactions anymore.” (IT manager). Moreover, the company suffered loss of data incidents, as the existing system couldn’t handle the increasing number of records. “The system could not handle the number of invoices, then we faced failure in the database, and we lost some data, so we decided to buy a new system.” (IT manager).

Ramsses produces dairy products like milk, cheese, and butter. The company also imports and distributes different kinds of fish.

(8)

Moutaz Haddara

ERP Adoption Cost Factors in SMEs 137

The company did not have a consultant during the selection process. The company did a rough cost estimation based on the vendor’s estimates. They hired one during the implementation process. The ERP modules implemented in Ramesses were FC, warehousing, purchasing, fixed assets, order management. The company now is considering implementing the HR and Manufacturing modules to extend their ERP.

3.3 Results and discussion

As previously discussed, the main aim of this research was to validate the cost factors list through interviews. And in order to increase the researcher’s understanding and the reliability of this research, the interviews included open ended questions about the evaluation, estimation, and budgeting methods the companies used. Moreover, they were asked about the difficulties they face during the application of formal budget estimation and ex-ante evaluation methods. In general, none of our four target organizations had followed formal practices for IT investment evaluation or cost estimation. “We did a rough budget estimation and total cost of ownership, which included the licenses cost, implementation costs and so on. We only calculated the external costs, which we will pay to third parties in cash, we didn’t calculate internal costs. We had also put 20% extra as a reserve, as some costs usually pop up during implementations, without prior expectations.” (IT Manager, Ra). In addition, according to the consultants and target cases interviewees, proper formal cost estimation and feasibility studies are very rare in the context of Egyptian ERP implementations in general. However, the informants still claimed that ERP requires significant financial resources. Moreover, the consultants and most of the informants from the target organizations reported that the ERP projects had often drastically exceeded their initial budgets and schedule estimations; some even doubled the initial budget. “…The actual expenditure was double our estimated budget, but we had to go on.” (IT manager, Ra). When the Ra’s IT manager was asked about why the costs have doubled, he said “because of external and internal factors. The external factors are related to the implementation partner, they under estimated the costs for this implementation scale, although we asked them to take enough time in their evaluation, but the implementation partner wanted to get the deal by any means. The internal factors were related to change management; we did not pay attention to this cost while setting-up the budget”. Implementation schedule estimations were crossed in all target companies. “We crossed our budget because of the delay in the schedule estimation, which is a cost, as well as, change management costs were not properly calculated, because of improper implementation scope estimation in first place.” (IS manager, Osiris). Vendors and consultants agreed that most of SMEs follow informal budgeting procedures. “SMEs are affected by the ERP offer prices; they usually do not properly include the infrastructure costs within the budget for example. They usually do not follow any formal budgeting procedures at all. But this differs when there is a consultant, usually he would roughly do a better budget estimation.” (Branch manager, Cheops). Moreover, some interviewees from client companies had doubts regarding the reliability of vendors’ project estimations, “relying on vendors’ cost estimates only is not wise, as sometimes they have problems in estimating costs that matches your organization’s size, or they just present a low and unrealistic cost estimate in order to win the implementation bid” (IT manager, Ra). Moreover, someexpressed the difficulty of conducting ERP cost estimations, “estimating ERP adoption costs is very difficult and almost impossible using the existing financial and budgeting models, because there any many hidden costs that you cannot expect or know the actual implementation” (IT manager, Ra).

In order to validate the costs list in figure 1, all the informants were asked to check if there are any costs that need to be added, modified, or deleted from the list. Moreover, they were asked add percentages of the total cost on every cost factor they spent money on. The purpose of adding the expenditures’ percentage is to try to map common cost factors between SMEs, which could aid in better estimations for new adopters. All informants agreed that the list is very comprehensive and it contains all the cost factors that usually occur during the adoption process. However, some of these cost factors apply to some cases, like machinery. “This list is carefully done, I will gladly put the percentages on the cost factors, as it

(9)

Moutaz Haddara

ERP Adoption Cost Factors in SMEs 138

could aid me in future projects as well, and it is important for me to have all the costs calculated as a reference anyway. I wish I had it beforehand, as it is a good visualization of cost factors.” (IS manager, Osiris)

Figure 2 presents a sample of a filled-in costs list by an informant. The informant put actual expenditure percentages for each cost factor related to their case.

Figure 2. List of actual cost percentages

The results are palpable that the cost identification and estimation process is problematic for both implementers and SMEs, which corresponds to IS and ERP cost estimation literature. All target cases have crossed their budgets due to unpredicted costs and schedule delays. Consultants and vendors stated that this happens in most cases, very rarely an ERP adoption project stays within the estimated budget because of unforeseen costs and delays. Cost factors are often unclear and many are hidden and overseen. The presented costs list could initially aid SMEs to identify all potential cost factors related to their case and scope, as well as, get a glimpse of actual weights of each factor to prepare a more rational budget estimates. Moreover, vendors, implementation partners, and consultant could benefit from the further extension of this research, as it would aid them to give their clients more realistic overview and estimations while considering all cost factors presented. Further, the list could help in developing a cost estimation model based on ERP-relevant cost factors and weights.

4

S

TUDY LIMITATIONS

This study is the first attempt to discuss and validate experiences of ERP adoption cost management and estimation in Egyptian SMEs. The findings and results are more practical than theoretical because the participants of the experts panel and interviews are actual ERP users and consultants. In spite of this strength, the study has weaknesses. Some limitations originated from the approach of our research. First, we had to rely on the retrospective experiences of the respondents. It may be argued that respondent views might be biased, however, we have asked the informants to give realistic percentages and estimations as possible. Second, 10 interviews only were carried out, as finding willing informants with the ERP-project financing details is not an easy task, however, some of the interviewees had experiences with more than 100 implementations. Third, our samples are limited to Egypt. Thus, general conclusions must be made with prudence. Moreover, the implementation of ERP in Egyptian SMEs could have some differences

(10)

Moutaz Haddara

ERP Adoption Cost Factors in SMEs 139

than other contexts, as in some cases, SMEs can apply for an ERP implementation partial funding from the Ministry of Trade and Industry, which usually covers half of the project expenses (this applies to 2 of our 4 target cases). This might affect the motivation for a proper cost management or control in some cases. However, ERP is no longer restricted within countries, because of globalization. Therefore, the findings of this study can be more than an indicator for other countries as well.

5

C

ONCLUSION AND FUTURE RESEARCH VENUES

This paper is primarily an effort towards identifying, listing, and validating the cost factors that occur in ERP implementations within Egyptian SMEs. Through an expert panel and interviews, 10 main cost factor nodes were identified, which subsequently have sub-factors. The importance of identifying these factors relies on the fact that many SMEs (and enterprises in general) which did not have a prior ERP implementation, might lack the experience to identify costs that they would actually pay for. Specially that some of these costs are not direct or visible, and interviews show that actual expenditure was usually higher than the estimated one. SMEs can use the presented costs list in this paper in order to better predict the cost factors they might face, or need to include within their budget estimations, as well as, would help in the cost management process. For research, the costs list could help other researchers to better investigate ERP adoption cases, or participate in action research during implementations. Moreover, the paper presented the current gaps in literature of ERP cost estimation.

This research has the potential to be extended in many corners. Validating and comparing results of this cost list with other SMEs in different countries would increase the validity and generalizibilty of the cost factors. In addition, this research can be extended to compare results between different enterprise sizes and/or industries. Moreover, using the cost list to study the difference between projected budgets and actual expenditures would help other companies to better estimate costs and have an idea about their weights before the actual adoption. Finally, the extension of this research would lead to a more realistic cost estimation model which is based on real data, collected from actual ERP adoption projects. In its current stage, the cost factors list presented might not be used as a cost estimation model as such, however, it would help potential SMEs in anticipating cost factors that occur during ERP adoption projects.

References

Abdel-Hamid, T. K., Sengupta, K., & Swett, C. (1999). The impact of goals on software project management: an experimental investigation. MIS Q., 23(4), 531-555.

Al-Mashari, M. (2002). Enterprise resource planning (ERP) systems: a research agenda. Industrial Management & Data Systems, 102(3), 165-170.

Alshawi, S., Irani, Z., & Baldwin, L. (2003). Benchmarking information technology investment and benefits extraction. Benchmarking: An International Journal, 10(4), 414-423.

Boehm, B. (1981). Software Engineering Economics. Upper Saddle River, NJ: Prentice Hall.

Boehm, B. (2000). Software Cost Estimation with COCOMO II. Upper Saddle River, NJ: Prentice Hall. Boehm, B., & Sullivan, K. J. (2000). Software economics: a roadmap. Paper presented at the Proceedings

of the Conference on The Future of Software Engineering.

Brocke, J. v., Schenk, B., & Sonnenberg, C. (2009). Classification Criteria for Governing the Implementation Process of Service-Oriented ERP Systems - An Analysis Based on New Institutional Economics. Paper presented at the AMCIS, San Francisco.

Buonanno, G., Faverio, P., Pigni, F., Ravarini, A., Sciuto, D., & Tagliavini, M. (2005). Factors affecting ERP system adoption: a comparative analysis between SMEs and large companies. Journal of Enterprise Information Management, 18(4), 384-426.

(11)

Moutaz Haddara

ERP Adoption Cost Factors in SMEs 140

Cavaye, A. L. M. (1996). Case study research: a multi-faceted research approach for IS. Information Systems Journal, 6(3), 227-242.

Chien, S.-W., Hu, C., Reimers, K., & Lin, J.-S. (2007). The influence of centrifugal and centripetal forces on ERP project success in small and medium - sized enterprises in China and Taiwan.

International Journal of Production Economics, 107(2), 380.

Daneva, M. (2004). ERP Requirements Engineering Practice: Lessons Learnt. IEEE Software, 21(2), 26-33.

Daneva, M. (2007). Approaching the ERP Project Cost Estimation Problem: an Experiment. Paper presented at the Proceedings of the First International Symposium on Empirical Software Engineering and Measurement.

Daneva, M., & Wieringa, R. (2008). Cost estimation for cross-organizational ERP projects: research perspectives. Software Quality Journal, 16(3), 459-481.

Davenport, T. H. (1998, July-August). Putting the enterprise into the enterprise system. Harvard Business Review, 121-131.

Economic-Research-Forum (2004). MSME Definition Study. from http://www.sme.gov.eg/English_publications/Definition.pdf.

Eden, C., & Ackermann, F. (2004). Cognitive mapping expert views for policy analysis in the public sector. European Journal of Operational Research, 152(3), 615-630.

Eisenhardt, K. M. (1989). Building theories from case study research. Academy of Management Review [AMR], 14(4), 532-550.

Elragal, A., & Haddara, M. (2010). The Use of Experts Panels in ERP Cost Estimation Research. In J. E. Quintela Varajão, M. M. Cruz-Cunha, G. D. Putnik & A. Trigo (Eds.), ENTERprise Information Systems (Vol. 110, pp. 97-108). Berlin Heidelberg: Springer.

Equey, C., Kusters, R. J., Varone, S., & Montandon, N. (2008). Empirical Study of ERP Systems Implemenations Costs in Swiss SMEs. Paper presented at the International Conference on Enterprise Information Systems (ICEIS).

Fui-Hoon Nah, F., Lee-Shang Lau, J., & Kuang, J. (2001). Critical Factors for Successful Implementation of Enterprise Systems. Business Process Management Journal, 7(3), 285-296.

Ghoneim, A. (2007, June). A comprehensive analysis of it/is indirect costs: Enhancing the evaluation of information systems investments. Paper presented at the Proceedings of the European and Mediterranean Conference on Information Systems, Polytechnic University of Valencia, Spain. Gibbs, A. (1997). Focus groups. Social Research Update, Department of Sociology, 19. Retrieved from

www.soc.surrey.ac.uk/sru/sru19.html

Haddara, M., & Päivärinta, T. (2011). Why Benefits Realization from ERP in SMEs Doesn’t Seem to Matter? Paper presented at the HICSS 44, Kauai, Hawaii.

Haddara, M., & Zach, O. (2011). ERP Systems in SMEs: A Literature Review. Paper presented at the HICSS 44, Kauai, Hawaii.

Hines, T. (2000). A Evaluation of Two Qualitative Methods (Focus Group Interviews and Cognitive Maps) for Conducting Research into Entrepreneurial Decision Making. International Journal of Qualitative Market Research, 3(1), 7-16.

Holland, C. R., & Light, B. (1999). A critical success factors model for ERP implementation. Software, IEEE, 16(3), 30-36.

Irani, Z., & Ghoneim, A. (2002). Identifying, Managing, and Controlling Information System Costs: An Exploratory Case Study. Paper presented at the Eight Americas Conference on Information Systems.

Irani, Z., Love, P. E. D., & Correspondence (2002). Developing a frame of reference for ex-ante IT/IS investment evaluation. European Journal of Information Systems, 11(1), 74-82.

(12)

Moutaz Haddara

ERP Adoption Cost Factors in SMEs 141

Irani, Z., Sharif, A. M., & Love, P. E. D. (2001). Transforming failure into success through organisational learning: an analysis of a manufacturing information system. European Journal of Information Systems, 10, 55-66.

Jones, C. (2007). Estimating software costs Bringing realism to estimating (2nd ed.). New York: McGraw-Hill Companies.

Jorgensen, M., & Shepperd, M. (2007). A Systematic Review of Software Development Cost Estimation Studies. IEEE Trans. Softw. Eng., 33(1), 33-53.

Klaus, H., Rosemann, M., & Gable, G. G. (2000). What is ERP? Information Systems Frontiers, 2(2), 141-162.

Kreuger, R. (1988). Focus groups: a practical guide for applied research. London: Sage.

Lerchs, G. (2001). The Study of Operational Definition for Micro, Small and Medium Sized Enterprises in Egypt. from http://www.sme.gov.eg/English_publications/SME_Definition.pdf.

Lerchs, G. (2002). Operational Definition for Micro, Small and Medium Sized Enterprises in Egypt. from http://www.sme.gov.eg/English_publications/SME_Definition.pdf.

Love, P. E. D., Irani, Z., & Edwards, D. J. (2004). Industry-centric benchmarking of information technology benefits, costs and risks for small-to-medium sized enterprises in construction. Automation in Construction, 13(4), 507-524.

Markus, M. L., Tanis, C., & Van Fenema, P. C. (2000). Enterprise resource planning: multisite ERP implementations. Commun. ACM, 43(4), 42-46.

Martin, M. H. (1998, 2 Feb.). An ERP Strategy. Fortune, 95-97.

Møller, C., Kræmmergaard , P., & Rikhardsson, P. (2004). A comprehensive ERP bibliography 2000– 2004. Department of Marketing, Informatics and Statistics, Aarhus School of Business.

Moon, Y. (2007). Enterprise Resource Planning (ERP): A review of the literature. International Journal of Management and Enterprise Development 4(3), 200.

Myrtveit, I., & Stensrud, E. (1999). A Controlled Experiment to Assess the Benefits of Estimating with Analogy and Regression Models. IEEE Trans. Softw. Eng., 25(4), 510-525.

Newman, M., & Zhao, Y. (2008). The process of enterprise resource planning implementation and business process re-engineering: tales from two chinese small and medium-sized enterprises. Information Systems Journal, 18(4), 405-426.

Powell, R., & Single, H. (1996). Focus groups. International Journal of Quality in Health Care, 8(5), 499-504.

Scheer, A., & Habermann, F. (2000). Enterprise resource planning: making ERP a success. Communication of the ACM, 43(4), 57-61.

Seddon, P. (2003). Second-Wave Enterprise Resource Planning Systems. New York: Cambridge University Press.

Stensrud, E. (2001). Alternative Approaches to Effort Prediction of ERP Projects. Inf.&Soft Techn., 43(7), 413-423.

Van Everdingen, Y., Van Hillegersberg, J., & Waarts, E. (2000). Enterprise resource planning: ERP adoption by European midsize companies. Commun. ACM, 43(4), 27-31.

Vogt, C. (2002). Intractable ERP: a comprehensive analysis of failed enterprise-resource-planning projects. SIGSOFT Softw. Eng. Notes, 27(2), 62-68.

Watts, M., & Ebbutt, D. (1987). More than the sum of the parts: research methods in group interviewing. British Educational Research Journal, 13, 25-34.

Willis, C. L., & Miertschin, S. L. (2006). Mind maps as active learning tools. J. Comput. Small Coll., 21(4), 266-272.

Figure

Updating...

References

Updating...